China steel sector eyes possible 2H supply surplus

China's steel market could shift back to oversupply in the second half of 2018 if its economic growth slows just as new mill capacity comes on line.

Market participants are looking past the current peak demand season to later in the year, when supply could be freed up to sell into export markets. China's steel markets have rebounded in April on increased sales to construction projects, drawing down inventories and keeping tonnes on shore.

"Chinese mills are not willing to export with their domestic markets generally better and spot supply limited from schedule maintenance and environmental restrictions," a Chinese mill-affiliated, Singapore-based rebar trader said. But market fundamentals could change in the second half of this year or in 2019, as a result of higher mill utilization rates and reduced downstream demand upsetting the supply-demand balance, he said.

New Asean steel supply will increasingly squeeze the market share of Chinese steel, including mills in Vietnam, Indonesia, Malaysia and Thailand, he said. Competition will increase in countries without local mill supply, like Hong Kong and Singapore, he said.

Support for supply-side reforms that have cut steel capacity has weakened over the past year, so restrictions on steel output are likely to loosen up in the second half, Chinese mills and exporters said this week. They see economic growth as likely to slow and with it weaker steel demand. Tighter credit could curb real estate investment and infrastructure spending in the second half. Even the government's spending on shantytown redevelopment projects has fallen from last year.

"Government policies need to balance deleveraging against cutting reserve requirements, more liquidity versus tight credit," said a trader that expects steel exports to improve modestly in the second half.

Trade barriers shift supply

China's steel exports have been a major target of protectionist measures in the US and Europe, and other countries are also affected which will lead to more steel staying in Asia.

US President Donald Trump imposed tariffs of up to 25pc on all US steel imports after a Section 232 investigation found that imports were a threat to national security, then made exemptions for most countries but they still affect many countries including Russia, Turkey, Japan, Taiwan, China, Vietnam, Thailand and India.

The EU has launched an investigation into steel imports that could target imports from countries including Turkey, which will then target more sales into Asia to offset the lost share in Europe.

Chinese steel exports have been falling dramatically since the record 112mn t recorded in 2015. In the first quarter, steel exports fell by 26pc to 15.15mn t from a year earlier. That is equivalent to an annualized rate of 60mn t/yr, or 20pc less than 2017 exports of 75.6mn t.

But with half the world's steel production, China's 800mn t/yr steel output could quickly unbalance seaborne steel markets if domestic demand falters.

China output still growing

China's domestic market could quickly tilt into oversupply if its policymakers tighten credit conditions significantly to slow projects and home purchases, or if new mill projects and utilization rate gains offset capacity cuts.

China aims to cut 30mn t of installed steel capacity this year, to achieve a five-year target to eliminate 150mn t/yr of blast furnace capacity two years before the 2020 deadline. But the cuts are a sliver of its 1bn t/yr installed capacity and do not take into account new additions.

China has managed to grow its steel output, even as it removes dormant obsolete capacity.

China's first-quarter steel output averaged 2.357mn t/d in the first quarter, a record for the period, equivalent to annualized output of 860mn t/yr of crude steel, China iron and steel association Cisa said. That marks an increase of 5.4pc from a year earlier.

China's reported steel output data does not take into account illegal capacity it shuttered last year. China closed down as much as 140mn t/yr of scrap-fed induction furnaces last year, in addition to its cuts of authorised capacity.

China will add an estimated 16mn t/yr of electric arc furnace capacity and increase the utilization rates of steel-based mills, a Chinese analyst said in a report last month. The biggest additions will be in southwest, central and east China.

A state-owned Chinese mill said it plans to expand its flat product exports with the start-up of two new blast furnaces in the second half of the year. Half of the mill's 7mn-8mn t/yr sales will target overseas markets with sales of SS400 grade hot-rolled coil, hot-rolled sheet and galvanized coil. An official at the mill said he expects China's steel exports to increase this year, but it is hard to forecast because the export market will depend on the conditions on domestic markets.